Wall Street to Washington: We Broke It. You Fix It.

By Heidi N. Moore

This week, as I was wrapping up a conversation with an investment banker, he suddenly sounded hurried. “Heidi, I have to go,” he said. “The Fed is here.”

As I was picturing my source being led away in handcuffs by brisk, bespectacled economists, he explained that the Federal Reserve is stepping up its examinations of investment banks. In a world of massive bank write-downs, balky credit markets and the subprime-mortgage imbroglio, regulation is every banker’s business now.

The latest case in point? Vikram Pandit, CEO of Citigroup–whose shares were murdered and left for dead by Goldman Sachs Group analyst William Tanona Thursday. He wrote an op-ed in today’s Wall Street Journal under the headline, “Toward a Transparent Financial System.” Many of Pandit’s points were Paulsonian: investment banks that borrow from the Fed should have to offer increased disclosure to the Fed, and maintain commercial-bank-like capital ratios, Pandit argued.

Why the sudden urge to communicate? Because the business of making deals–mergers, financings, the corporate money machine that keeps this country going and depends on investment banks–is waiting nervously for a regulatory storm to pass. And to make sure it passes without tearing down Wall Street’s houses, Wall Street types are taking to the Op-Ed pages to tell the Fed and other Washington types exactly how to flip those regulatory burgers.

In some ways, this outpouring of opinion is an odd choice; after all, Treasury Secretary Hank Paulson is a former investment banker; can’t all these bigwigs just pick up the phone? But there’s a broader hearts and minds battle to be fought here, apparently.

We take you on a tour of what these Wall Streeters want to see happen to Wall Street, organized by their two major themes.

Theme No. 1: Regulators, Please Do More

Olivier Sarkozy and Randal Quarles of the Carlyle Group argued in The Wall Street Journal this week that regulators need to loosen rules on private-equity ownership of financial firms. Current regulations limit even nonvoting investors to 15% ownership of a financial institution. Sarkozy–a former UBS banker–and Quarles, who was a high-ranking Treasury official in the administrations of George Bush pere and fils, wrote, “Private equity is ready and willing to step forward in large amounts [to invest in banks]–restoring lending capacity, encouraging efficiency, and protecting the taxpayer. The Federal Reserve and other banking regulators can help remove obstacles to this important pool of capital.” Sarkozy and Quarles are making the same point that Blackstone Group was trying to make when it was battling regulators on the now-defunct buyout of Alliance Data Systems.

Vikram Pandit, similarly, asked regulators to get more involved…in investment banks. Ok, he doesn’t actually say “investment banks,” but his euphemistic vocabulary points toward brokerage houses like Goldman Sachs and Lehman Brothers Holdings that have been Citigroup’s rivals in investment banking and lending. Pandit argues that the Fed should keep a close eye on capital ratios at “systemically significant financial institutions” and on “transparency.” This is a common line from commercial-banking CEOs; Bank of America’s Ken Lewis argued for similar measures at the Wall Street Journal’s Deals & Deal Makers Conference this month. Essentially, Pandit argued that investment banks should be as tightly regulated as commercial banks like his Citigroup and criticized “an uneven application of regulations and accounting standards in an environment where capital and talent are mobile and where traditional classifications are being redefined.”

Theme No. 2: Jingoist Patriotism Is No Advantage in Matters of Finance

In a searing op-ed in the Financial Times last week, Blackstone Group CEO Steve Schwarzman warned the U.S. to ignore sovereign-wealth funds at its own perils. Schwarzman reminded readers, “The US is the world’s largest debtor nation and we are now in an uneasy relationship with our creditors. We cannot afford to get this wrong.” And what is the U.S. getting wrong? The outpouring of hostile rhetoric about some sovereign-wealth funds, those foreign investors that are putting much-needed cash into our nation’s troubled banks. “[China Investment Corp] is not alone in its frustration with political grandstanding on SWF investments in the west. When I talk to some of the SWFs (and I have been dealing with them for more than 20 years), they are both amazed and annoyed that their actions, which are such a positive for the US economy, have been met with such hostility and anger in some quarters.”

Comments (5 of 13)

Unfortunately the mislaced priority of the financial services industrial establishment is "grab the dough gotta go." All the blathering about capital formation and orderly markets is a bunch of three card monty hucksterism. Frankly, I trust the Arab SWFs more than I trust the moneymen in Italian wing tips who make a living pushing the regulatory envelope away from themselves and towards their competitors down the street. Nothing has changed since 1929, just the players and the comlexity of their sleight of hand.

12:28 pm July 3, 2008

Fred wrote :

Most of these i-banks got into trouble with non i-banking activities, namely proprietary trading. There is no way that all of thee sub-prime securities has liquidity and were held for a couple weeks for resale. prop trading is fundamentally a different business than underwriting.

9:59 pm June 29, 2008

W.Breitschwerdt wrote :

Theme 2. The irony is that if the SWF's were 100% transparent in their dealings; they would not have been allowed to make those hasty, and very unprofitable, investments into US banks and brokerages.
These investments were made with minimum (insufficient) due diligence and they basically didn't know what they were buying into. Many of these SWF's are run by managers who are former investment bankers or Long-Fund managers and they do not possess the skills or experience to assess the distressed books of Citi or Morgan Stanley.
It took Jamie Dimon, dozens of his top lieutenants, traders, risk managers, and external counsel a week to get a rough idea of what they were buying into at Bear Stearns. What makes you think a group of Chinese, Singaporean, and Dubai fund managers have a clue of what they were getting themselves into? The money (paper losses as of now) these SWF's have lost so far are only second to the subprime losses experienced by the banks they invested in.

4:24 pm June 29, 2008

Conventional Wisdom Guy wrote :

Hey, Tanona just told the truth about Citi. You can not murder a stock by telling the truth. What can be murdered by truth is lie.

5:08 pm June 28, 2008

Antonios wrote :

Thank God my kids have Canadian citizenship so that they can ditch this hot-dog stand of a country.

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